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The True Value of Political Connections
According to new research by GSE Affiliated Professor Hans-Joachim Voth, firms supporting the NSDAP (National Socialist German Workers' Party) outperformed the stock market by 5-10% after the Nazi party seized power in 1933. The findings are revealed in his paper "Betting on Hitler: The Value of Political Connections in Nazi Germany" (with Thomas Ferguson), published in February in the Quarterly Journal of Economics.
Since the end of WWII there has been much speculation about the extent to which German businesses backed the Nazi movement financially and politically. "I grew up in Germany. The history textbooks in high school always emphasize that the communist story of the Nazis acting as agents of the capitalists is not supported by the documents," says Professor Voth. "I always worried about that - we know that many companies made bonfires as the Allied armies approached in 1945. How do we know that firms didn't give support?"
Over lunch with University of Massachusetts Professor Thomas Ferguson in Cambridge, MA in 2002, the two researchers came up with the idea to look at what the stock market saw in 1933. While previous research has primarily focused on the connections between executives and the Nazi party, "if links with the Nazis were valuable they should lead to higher stock prices," says Professor Voth. "So, we decided to dig and see what we can come up with.”
Together, the researchers analyzed the value that stock market investors attached to affiliations with the Nazi party. To do this, they looked at the stock prices of firms, both with and without party connections, in the months preceding and following the Nazi party gaining power at the end of 1932.
In total, they examined 789 firms listed on the German stock exchange in 1932, 91 of which were identified as supporting the Nazi party prior to Hitler coming to power. Connections could be gained in two ways: "Giving money to the party for two groups that financed economic advisory groups, or writing to the German president urging him to make Hitler chancellor both constituted support," says Professor Voth. A large part of the project was collecting the data on board members and on share prices. Stock returns for these firms were gleaned from documents of the Berlin exchange beginning in May 1932 - some months before the Nazi party rose to power in January 1933 - and tracked until May 1933.
Results indicate that stock market investors quickly recognized the value of political connections and chose to invest in firms that had an affiliation with the new governing party. This sent the share prices of connected firms up once the new regime was firmly established. The authors find that once NSDAP came to power, affiliated firms outperformed the stock market by 5-10%. Connected firms accounted for the largest part of the rise in total market value.
Additionally, their research sheds light on the extent of connections. By analysing board members instead of just executives, Ferguson and Voth find much more extensive links. Weighted by stock market capitalization in 1932, more than half of listed firms on the Berlin stock exchange had substantive links with the Nazi movement. The larger a firm was, the more likely that it supported the Nazi party.
Though the study quantitatively reveals the value of having close, early connections to the Nazi party, the authors are cautious about the importance of business support for the NSDAP's rise to power. "Getting better economic advice made the NSDAP a more serious party in the eyes of the conservative elites. The firms financed a good deal of that," notes Professor Voth. "However, I'm not sure it made a difference in the end, in terms of coming to power. Appointing Hitler was a decision made by German President Paul von Hindenburg; the support by industrialists in the fall might have helped somewhat, but I doubt we will ever know what was on his mind when he made the fateful decision.”
Hans-Joachim Voth (D.Phil, Oxford, 1996), is Director the BSE Msc in International Trade, Finance, and Development. He is an economic historian with interests in financial markets, long-run economic growth, as well as political risk and macroeconomic instability. He is an ICREA Research Professor at the UPF, a Researcher at CREI, a Research Fellow in the International Macro Program at the CEPR (London), and a member of the editorial board of the Journal of Economic History. In 2009, he will become an editor of the European Review of Economic History.
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Betting on Hitler: The Value of Political Connections in Nazi Germany